Chevron (NYSE: CVX) has been a fantastic income stock over the years. The oil giant recently extended its dividend growth streak to 38 straight years. That's a rare feat, considering that only about 80 publicly traded companies in the U.S. have delivered 35 or more years of dividend increases. Chevron's track record is even more impressive because it operates in the volatile oil sector.
The oil industry's volatility can scare off some income investors. However, Chevron has proven that it pays a durable dividend that can withstand the oil sector's wild swings. The company is in an excellent position to continue increasing its high-yielding dividend (a 4.5% current yield compared to 1.2% for the S&P 500) in the future. Because of that, income-seeking investors won't want to overlook Chevron's payout.
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Built on a strong foundation
Chevron operates a globally integrated energy business. It produces oil and gas (upstream), manages midstream energy infrastructure to transport, process, and store some of its production, and owns downstream chemicals and refining assets. This strategy helps Chevron maximize the value of its production and acts as a natural hedge against commodity price fluctuations (downstream businesses benefit from lower prices). As a result, Chevron produces steadier cash flow than peers focused solely on the upstream segment of the oil market.
Last year, Chevron produced $31.5 billion in cash flow from operations. That was more than enough money to cover its capital spending ($16.4 billion), enabling it to produce about $15 billion in free cash flow. That excess cash easily covered the oil company's dividend outlay of $11.8 billion.
Chevron returned all its remaining excess free cash flow -- and then some -- to shareholders by repurchasing $15.2 billion of its shares (retiring 5% of its outstanding shares). That brought its total cash returns to a record $27 billion last year. The company covered the deficit with its strong balance sheet and asset sales -- $7.7 billion from selling its Canadian assets and some non-core positions in the U.S.
Even with those massive cash returns, Chevron maintained a strong balance sheet. "The balance sheet is in excellent health, with net debt below our historical levels," stated CFO Eimear Bonner on the company's fourth-quarter conference call. The oil giant ended the year with a net leverage ratio of 10%, well below its 20%-25% target range.
Plenty of fuel to continue increasing its dividend
Chevron's strong financial profile has allowed it to grow its dividend at a healthy pace. It increased its payout by 5% for 2025. "Over the past five years we have grown our dividend faster than the S&P 500 and nearly double the rate of our closest peer," said the CFO on the conference call. That above-average growth rate should continue.
A big factor fueling that optimism is Chevron's expectations for free cash flow. CEO Michael Wirth said on the call: "Chevron is poised for industry-leading free cash flow growth. We expect to add $10 billion of annual free cash flow in 2026."
One thing driving that outlook is the recent completion of its future growth project in Kazakhstan. The company expects to see a sustained increase in distributions from that investment in the future. "At $70 Brent [the global oil price benchmark], expected free cash flow to Chevron is $5 billion in 2025 and $6 billion in 2026," noted the CEO on the call.
Chevron is also growing its production in the Gulf Coast region, "where we produce some of the highest margin barrels in our portfolio," said Wirth. The company recently completed its Anchor and Whale projects, which are ramping up, and expects to bring Ballymore online this year. Chevron is also growing its production in the Permian Basin.
In addition, the company is working to reduce costs. It expects its capital spending to fall to a range of $14 billion to $16 billion in 2025. The company also aims to deliver $2 billion to $3 billion of structural cost reductions by the end of next year.
There's lots of additional upside potential for Chevron's free cash flow from higher oil prices and its pending acquisition of Hess. The company believes it will win its arbitration case against Exxon, which would allow it to close that needle-moving deal in the third quarter. Buying Hess would make Chevron an even stronger oil company and further enhance its ability to grow its free cash flow in the coming years.
A well-oiled dividend
Chevron has done a fantastic job paying dividends. It has proven the durability of its payout for nearly four decades. Meanwhile, it has delivered above-average dividend growth in recent years. That should continue, given the expected surge in the company's free cash flow. Because of that, Chevron's high-yielding payout is on a very sustainable foundation, making it an ideal option for investors seeking a lucrative passive income stream.
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Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
